Flashcards in Planning and Control Deck (31):
Define "master budget."
A comprehensive plan for all activities of a company (sales, production, cash management, etc.); this is a static budget: it provides a basis for comparison at a planned level of sales and production and is not usually changed to conform to actual events.
Which budget must be done first - production or purchases?
Production must be done first. The production budget establishes how many units must be produced to achieve projected sales volume and inventory level targets.
Define "participative budget."
A method of preparing budgets in which managers prepare their own budgets. These budgets are then reviewed by the manager's supervisor, and any issues are resolved by mutual agreement. This method is widely considered a positive behavioral approach.
Define "strategic budgeting."
Strategic budgeting is a top-down process, starting with the goals and mission the organization wants to achieve and allocating resources in proportion to priorities.
Define "rolling budget."
An incremental budget that adds the current period and drops the oldest period. Kaizen (continuous improvement) type companies typically use rolling budgets.
Define "zero-based budgeting."
A process of starting over each budget period by justifying each item budgeted. This requires additional work over an incremental approach but may provide more accuracy.
Define "budgetary slack."
The deliberate overestimation of expenses or underestimation of revenue for a project. Budgetary slack may be built into a project for a cushion in case targets are not met.
What purpose does probability analysis serve?
It evaluates the likelihood of a specific event occurring when several outcomes are possible; the probability of a particular outcome is always between 0 and 1 (never and always); the sum of the probabilities associated with the possible outcomes is always 1.
Define "expected value".
The long-run average outcome; determined by calculating the weighted average of the outcomes (multiply the value of each outcome by its probability and then sum the results). (Useful life example)
Define "joint probability".
The probability of an event occurring given that another event has already occurred. The joint probability is determined by multiplying the probability of the first event by the conditional probability of the second event.
What does the correlation coefficient (R) measure?
Measures the strength of the relationship between the dependent and independent variable. The correlation coefficient can have values from -1 to 1.
What does the coefficient of determination (R2) indicate?
Indicates the degree to which the behavior of the independent variable predicts or explains the dependent variable. The coefficient of determination is calculated by squaring the correlation coefficient. R2 can take on values from 0 to 1.
Describe the cost equation necessary for the calculation of regression or the high-low method.
The relationship between fixed costs, variable costs, and total costs expressed as a regression equation: y = A + Bx
y = Total Costs (dependent variable)
A = Fixed Costs (the y intercept)
B = Variable Cost per Unit (the slope of the line)
x = Number of Units (independent variable)
or Total Costs = Fixed Costs + (Variable Cost per Unit × Number of Units.)
List the basic formula for breakeven analysis.
(Quantity X Sales Price) = Fixed Costs + (Quantity X Variable Costs per unit).
How does the denominator differ when calculating breakeven units and breakeven dollars?
Units = price - variable costs per unit; Dollars = (CMunit /price).
Describe the breakeven formula in units.
Fixed costs divided by (price - variable costs per unit).
How is the contribution margin ratio calculated?
CM ratio = CM per unit / price; this represents the percentage of each sales dollar that is available to cover fixed costs.
What is the importance of the contribution margin to breakeven analysis?
Contribution margin represents the portion of revenues that are available to cover fixed costs.
How do we calculate sales in units needed to achieve a target level of income?
Sales in Units = (Fixed Costs + Targeted Profit) / Contribution Margin per Unit.
What are the major assumptions of the cost-volume-profit (CVP) model?
All relationships are linear; the number of units sold equals the number of units produced; fixed costs, unit variable costs, and price must behave as constants; volume is the only driver of costs and revenues; total costs can be divided into a fixed component and a component that is variable with respect to the level of output; and the model applies to operating income (i.e., the CVP model is a before-tax model).
What is the intersection of total cost and total revenue on a graph?
The breakeven point.
What does the flat line on a cost-volume-profit (CVP) graph always represent?
It represents fixed costs.
Who is responsible for direct material price variances?
The purchasing manager is responsible for these.
Describe the accounting treatment of non-significant variances at the end of the period.
These amounts are closed to Cost of Goods Sold.
Define "standard quantity".
Standard quantity is the standard amount of input units allowed for the actual number of output units produced.
Are standards based solely on historical results?
No; standards are not only based on historical performance, as this may incorporate past periods' inefficiencies.
On what are sales variances based?
Sales variances are based on budgeted sales levels.
Define "volume variance."
An uncontrollable fixed overhead variance equal to the difference between budgeted fixed overhead and fixed overhead applied to production (fixed overhead rate times the standard quantity of units allowed for actual production).
Define "budget variance."
A controllable fixed overhead variance equal to the difference between the budgeted fixed overhead and the actual fixed overhead; budget variances are the result of unexpected changes in components of fixed overhead (i.e., a change in the salvage value or the estimated life of a piece of manufacturing equipment triggers a change in depreciation expense).
Define "overhead efficiency variance."
A controllable variable overhead variance calculated by multiplying the difference between the actual allocation base units used (hours, gallons, pounds, etc.) and the estimated allocation base units by the estimated cost per unit.